The Charles Schwab Corporation (SCHW) Earnings Call Transcript & Summary

We're joining live from the Schwab Impact Conference in Denver, where a lot of exciting conversations around the independent advice space have been taking place all week. Of course, today, we had some more exciting news across the wires. Hopefully, you've had a chance to review our press release earlier this morning announcing our acquisition of Forge Global. During today's short call, management will share some initial perspectives on this great opportunity, as well as facilitate a short Q&A session. First, before we dig in, let's take a quick look at the wall of words, which reminds us, as always, that expectations may change and evolve over time, so please stay in touch with our disclosures. And with that, I'll turn it over to Rick.

Thanks, Jeff, and good morning, everyone. Thank you for joining us on such short notice. For more than 50 years, Charles Schwab has focused on helping individuals achieve better financial outcomes by democratizing access to investing and innovating to help our clients manage, grow, protect and pass on their wealth. Chuck founded this firm because he passionately believes in the powerful idea that companies are meant to grow, and anyone can participate in the growth of public companies to build their wealth over the long term. And that remains true today. At the same time, companies are staying private for longer than they once did. And the market for buying and selling shares of pre-IPO firms is fragmented, inefficient and ripe for democratization. We believe helping more people participate directly in the growth of private companies is a meaningful opportunity for wealth creation that will be attractive to qualified individual investors and the advisers who serve them. Our acquisition of Forge will allow us to round out our alternatives offer by providing retail and RIA clients with alternatives from leading managers, passive exposure to alternatives via funds and direct investing in private companies. It also positions us to bring our Through Client's Eyes innovation to this important and growing slice of the economy in the form of expanded access, deeper liquidity and increased transparency. This deal brings together leaders in public markets and private marketplace transactions, and the combination positions Schwab to offer a best-in-class experience across both markets for individual investors and the registered investment advisers who serve them. Schwab serves nearly 46 million client accounts and $11.59 trillion in assets, making us #1 among peers who report on that metric. We are #1 in RIA custodial assets. We're #1 in retail trading as measured by daily average trades, and there's not a close second. And in the last 12 months, Schwab clients have traded nearly $18 trillion in equities. Forge offers investors private share access through direct share purchases, single-company funds and multi-company funds. It is a leader in the space with more than $17 billion in private market transaction volume since its inception, more than 3 million unique users and more than 625 private firms traded on their platform. If transactional activity in the private market grows to become even a small fraction of the public market, it will be a huge win for our clients who are looking to participate in the growth of pre-IPO companies. And it will be an attractive source of revenue diversification for Schwab. Forge is a pioneer in democratizing access to private company markets. It is #1 in the private market space as measured by the number of trades in pre-IPO company shares and the size of its issuer network, earning its place as the leader because of its issuer-friendly business model. This is notable, as Forge's model seeks a company's approval before executing a sale of their shares, which will support Schwab's efforts to deepen relationships with private companies across our entire business ecosystem. Forge has an attractive combination of a direct marketplace for trading private shares, along with asset management capabilities, private company solutions, proprietary data and custody services. This holistic set of capabilities sets it apart in the space and creates attractive synergy opportunities, which Mike and I will talk more about. But first, I want to spend a moment on the size of the opportunity that we see in private markets. The momentum in private markets is driven by a couple of broad trends. First, there's significant value creation taking place within our economy within private companies. Looking back 25 years, companies had to go public to raise capital for growth. That's no longer the case. Companies are waiting more than twice as long to go public. The median age of VC-backed IPO companies in 2024 was 14 years compared to 6 years in the year 2000. That's a big part of the reason that the number of IPOs has decreased 85% since then. As a result, the median valuations of the IPOs we do see are more than 3x what they were 25 years ago. Second, higher net worth investors are increasingly looking to private markets for diversification, and we expect the market to grow significantly through the cycle. Looking at alternatives more broadly, private wealth capital allocated to alternatives globally is expected to surge from $4 trillion today to $13 trillion by 2032. We believe there is $9 trillion of potential supply in private securities today, about 20% of which is estimated to be tradable. Incorporating Forge's private market capabilities builds on our continuing focus on innovation that helps our clients manage, grow, protect and pass on their wealth. This direct access to private securities builds on our retail alternatives launch earlier in the year, which provides access to leading alternative solutions supported by a team of Schwab experts. For traders, we've expanded the 24/5 trading and are readying our crypto launch. Direct and indirect access to private securities provides traders with another investment option. For advisers, we've enhanced our wealth services infrastructure to support our advisers. We've launched Advisor ProDirect and have continued to enhance the industry's leading Pledged Asset Line experience. Finally, we've innovated to help our higher net worth clients manage their wealth with offers that include discretionary wealth management, help with concentrated positions and investments in trust and estate capabilities. The acquisition of Forge will help us meet even more of our clients' evolving needs while also supporting organic growth, helping diversify revenue through the cycle and creating symbiotic opportunities across the business lines of both firms. Within our existing client base of 46 million client accounts, millions of existing clients across retail and adviser services have assets north of $1 million at Schwab. When you apply the most basic accredited investor lens of income and think about assets our clients have held away, the number of eligible clients at Schwab today who are looking to diversify with alternatives and in private markets specifically is unmatched in the industry. Schwab will be the place for private market sellers to find interested buyers and vice versa across our Retail and Advisor Services client segments. And that's not all. Our purchase of Forge, combined with our recent launch of Schwab Private Issuer Equity Services, helps us create an ecosystem where we can administer private stock plans while providing access to liquidity for employees and investors, all while creating a pre-IPO pipeline of future stock plan services clients for Schwab. Our plan is to expand our private market capabilities to all qualified retail RIA and stock plan services clients with a fully integrated experience in the medium term, which I estimate to be within the next couple of years. But we will hit the ground running as soon as the deal closes, and we'll continue to roll out offerings in the near and medium term. Starting immediately after close, we will roll out Forge's offer to select ultra-high net worth investors, launch '40 Act funds that will offer indirect access to private markets for retail and RIA clients and continue to integrate and enhance the client experience. In the near term, we'll expand access to 1 million-plus retail clients, launch our RIA experience, expand fund offerings and continue to integrate Forge into our existing infrastructure. Finally, in the medium term, we'll expand retail access to all qualified investors, enhance our stock plan services capabilities, launch additional proprietary solutions and provide clients across the firm with a fully integrated experience. We see tremendous opportunity. And if it plays out successfully, this capability will be worth many multiples of the purchase price. I'll turn it now to Mike to talk through the specifics of the transaction.

Thank you, Rick, and good morning, everyone. Let's take a moment to walk through some of the high-level transaction details. This is structured as an all-cash deal at $45 per share or an implied Forge equity value of $660 million. Given our strong levels of capital and liquidity, we plan to fund this deal with cash. The transaction has been unanimously approved by both Schwab and Forge's respective Boards of Directors and is subject to customary closing conditions and reviews. We anticipate closing this transaction during the first half of 2026. Inclusive of expected synergies, this transaction will be accretive. However, it is not expected to have a material impact on our near-term financials, including the 2026 financial scenario we plan to share at the upcoming January business update. Although the near-term financial impact may be limited, we believe this acquisition has the opportunity to meaningfully enhance stockholder value over time. Therefore, while we do expect to realize some modest expense synergies in the post-close, the upside lies primarily in the medium-term revenue opportunity across all aspects of Schwab's platform. Bringing Forge into the Schwab ecosystem helps further enhance our capabilities for clients and accelerates our speed to market within the alternative investment space. As Rick outlined, we'd expect both the client and financial benefits to begin within our retail business. However, over time, we see meaningful upside across our adviser services and workplace businesses as well. As we integrate a growing set of private market capabilities alongside our current suite of modern wealth solutions, we expect the breadth of the offering to support franchise growth and help to further diversify our revenue mix through the cycle. So in conclusion, we believe this acquisition is a win-win. Importantly, it is a win for Schwab's clients. Following the close of this deal, they will have access to a best-in-class modern wealth experience that spans across both the public and private markets. It is also a win for stockholders, as this transaction has the opportunity to strengthen our momentum by further enhancing our leading competitive position in the marketplace, supporting our long-term organic growth objectives and diversifying our revenue mix over time as clients engage with an expanding suite of offerings. Of course, today is just the first step. There's still more work to be done to get this closed and the initial client rollout underway next year. So we look forward to sharing additional perspectives on the exciting possibilities we see for Schwab within the private markets over time. And with that, we set aside time for a short Q&A. Operator?

[Operator Instructions] Our first question comes from Bill Katz with TD Cowen.

Okay. Thank you very much for the information and the update. Maybe my question is just in terms of the client overlap, I'm sort of curious that they have about 3 million clients, looks like you have obviously, a much larger footprint. How does that look in terms of the incremental opportunity to cross-sell? What does the client base look like for them in terms of maybe AUA per client, et cetera? Just trying to understand, maybe the opportunity for cross-sell seems very powerful to me.

I think that the reason we're taking on this transaction is about bringing Forge's capabilities to our 46 million clients, and that's where we see tremendous upside. If you look at the RIA community, our RIAs, we have $5 trillion of assets. We've got roughly 1% to 2% exposure to alternatives among our RIAs on our platform. We think that number over time is likely to grow quite significantly, and we think it will grow in a few ways. One, through alternative asset managers. And we've been improving our platform there, both for RIAs and individual investors. Two, we think that many -- like people participate in public equity markets via an index-type fund strategy. We think a lot of investors will want exposure to a broad basket of private companies. And we're excited in the first quarter of next year that Forge is going to be launching a '40 Act fund, which will provide exposure to the 60 biggest private companies, creating a diversified basket. We think that will appeal to a lot of RIAs and a lot of retail clients. And then finally, we know investors are engaged in individual stocks, and to be able to participate both in public and private markets will be a significant opportunity across both RIAs, but in particular, among our more active traders. So I think the real synergy here is taking the capabilities of Forge, offering them to our 46 million clients and seeing it grow. That said, we will certainly mine the 3 million clients at Forge and would love to make as many of them as possible, Schwab clients.

Our next question comes from Brennan Hawken with BMO.

Congrats on the deal. This is interesting. And the interesting thing to me about it is about Forge's relationships with the corporates, which seems like you guys are planning to fit in with the stock plan offering that you have at Schwab. Could you speak a little bit more about what they offer to the privates, just to help us get a better understanding about those services and how deep those relationships are?

Thanks for the question. So Forge sources liquidity from a variety of areas. One important one, as you know, is private companies. And they have the deepest set of relationships in the market with over 625 relationships with private companies, which is the largest number in the market. That was something that was really attractive to us because we want to be in a position to sell -- or for clients to be able to buy actual ownership in the company. And in order to do that, you need to have a relationship with the private companies. And Forge has those ties and has the infrastructure and team to be able to expand on that, build on those relationships and grow them. And we expect that as we make this market more efficient and larger, that the private companies will find it even more attractive to work with us, and that number and that roster will grow. As it relates to the -- serving them in their cap table management or private stock plan administration, we do think that is also a real opportunity. So the combination of the announcement we made in recent weeks about the partnership with Capita, where we took an ownership position in Capita and at the same time, are launching a commercial relationship where we will use their technology capabilities to administer private stock plans. That, in combination with the ability for those private companies to create liquidity for their employees via Forge's capabilities is a very powerful combination. And in combination with the strength of our broader stock plan business and our retail footprint, it's going to be really hard to match what we can do for private stock plan administration.

Our next question comes from Devin Ryan with Citizens.

Congratulations. I know the Forge team well, really interesting combination here. Question on just the client base as well. So Forge has a number of institutional customers that are providing liquidity on the platform, buying and selling. I'm curious if you're going to keep the offering open to institutional investors to buy and sell? Is this going to give you a better connection with institutions? So I want to get a thought there. And then -- just -- if I could squeeze another kind of thought in on kind of just the primary capital opportunity as well. You have such a big network, and the demand you're talking about is going to be very valuable to issuers to potentially access your network for primary issuance as well on the private side.

Sorry, do you mind repeating the first part of the question? Sorry about that.

Yes. Sorry, it was a long question. Yes, just a connection point to institutional investors, given that Forge has a lot of institutions on the platform that are both buying and also selling shares?

Got you. So yes, it's something we'll evaluate, but at the moment, we certainly expect to continue those relationships. In general, we want as much liquidity flowing through the platform as possible. We want supply from the company side. We want as much demand from our clients, from institutions, wherever it comes from on both sides. I think we want to expand this marketplace, provide efficiency and grow it. So the immediate answer is yes, we have plans to keep that. But we'll, of course, as we get into the business more deeply and learn about it, we'll find out more.

Our next question comes from Brian Bedell with Deutsche Bank.

Congrats on the deal. Maybe just think about it broadly for the future Schwab organic growth opportunity, how are you thinking this can enhance that? It sounds like there's a lot of ways it can in terms of potentially having people bring more assets to the platform to qualify for the private company, individual private companies, not to mention just the attraction of the overall ecosystem that could help enhance organic growth. And then, of course, even potentially founders of companies in terms of wealth management. Maybe if you could just talk a little bit about -- is that something that you think can materially enhance your NNA growth rate over time? Or is it -- is this a little bit small in the grand scheme of that concept?

Well, I think it will enhance our NNA, and I'll share a few reasons why I believe that will be true over the medium term. I also think it provides us with a meaningful call option on what transpires in private markets and the many directions that it could take, having the leading public equity market provider and the leading private marketplace for private securities. As the private marketplace evolves, the upside there is potentially tremendous in a variety of different ways. But let me touch on where I see the NNA opportunity. First, with our active trader group, which is a big group of our retail business and one that contributes a lot of NNA and is a profitable group to serve. This gives them another way to engage on our platform, another asset class of great interest to them. Many of -- companies which they know and are familiar with that they would love to invest in. So I think it will appeal to traders. Second, we do have a lot of high net worth and ultra high net worth investors who have kept some portion of their assets away from us because they wanted access to alternatives. And with the launch we rolled out with our retail alternatives platform and with this acquisition of Forge, I think in the future, there's no reason for a Schwab -- ultra high net worth Schwab client to hold some of those assets away. And so I think by keeping those assets at Schwab and bringing some of them back, I think that will be an accelerant to NNA. Third, the stock plan business. I expect that we will be an appealing partner for pre-IPO companies and that we could see NNA there. And then finally, in the RIA space, as you know, we are the leading provider -- leading custodian, and we've got a decent margin ahead of the second one. One of the areas where I think that we need to strengthen our capability is around alternatives. And it's why the RIAs on our platform have somewhere between 1% and 2% allocation to alternatives. And it's because the alt-heavy RIAs likely are somewhere else because our platform hasn't been quite where we wanted it. And I think the combination of the work we're doing to improve that platform now, the opportunity for RIAs to invest either directly in single name private securities or to own a basket of them, diversified basket fund and -- or access a leading alternative manager, I think that's going to change that dynamic. It will lead to us winning even more business with RIAs because outside of that, unquestionably, we are winning with the RIAs and have an offer that can't be matched. So I'm thrilled about what this does across every one of our businesses, the RIA business, our retail business and our stock plan business.

Thank you. And at this time, I would like to turn the call back to the speakers.

Super. Well, thanks, everyone, for joining on such short notice. And thanks for your time and engagement this morning. We are incredibly excited about the opportunity we have to help more clients across our business lines build wealth and diversify their portfolios by participating directly in the growth of private companies. Combining Schwab and Forge, both leaders in our respective markets, means we can bring Through Clients' Eyes innovation to an important and growing slice of the economy by expanding access, deepening liquidity and increasing transparency. The deal helps us meet even more of our clients' evolving needs, supports organic growth, creating symbiotic opportunities across the business lines of both firms and helps us diversify revenue through the cycle. We look forward to sharing more with you in the months ahead, and thanks again for joining and for your engagement this morning.